Tap Economy's Accelerator

December 18, 2000

Will the landing be soft or hard?

That's the question facing both the Federal Reserve and President-elect George W. Bush as they watch the economy wobble down to a speed much lower than the 4 to 5 percent growth rate of the late 1990s.

The economy has slowed abruptly, considerably faster than anticipated. Though most forecasters still expect a comfortable soft landing for business, concern is rising rapidly that a combination of layoffs, tumbling stock market, steep oil prices, slipping retail sales, and weaker corporate profits could snowball into a recession.

The Fed first put on the brakes in June 1999. Since then it has raised rates five more times, each time 0.25 percentage points. That tightening was portrayed as a preemptive move against inflation. Real interest rates are now at a 13-year high and are one of several drags on the economy.

Consumers, faced with those interest rates and high-energy costs, are losing confidence. A plurality of Americans - 43 percent according to a Wall Street Journal/NBC news poll - foresee a recession next year. Retail sales are slower than what merchants hoped for this holiday season.

And inflation seems tame. Producer prices rose a mere 0.1 percent in November. Economists are again talking of deflationary trends.

Few Fed watchers expect the bank to lower the rate now, though. Most figure the central bank will simply move in its policy statement from billing inflation as the prime risk in the economy to a "neutral" position.

It won't be terrible if the Fed waits until January to act. Economic forecasting is an art, not a science. But we would rather see a cautious shift now.

So, undoubtedly, would Mr. Bush. Even before naming a Treasury secretary or asking Congress to pass a tax cut, he's warning about an economic slowdown. He and Fed Chairman Alan Greenspan have a mutual interest in a soft landing.